As we undergo measures of dealing with a completely exogenous–external–shock, this is like a dream-come-true scenario for teaching economics. For the time being, we no longer need to conjure up abstract stories to drive the point of the law of demand or how prices tend to find some equilibrium. We don’t have to explain the marvel of the division of labor, specialization, and comparative advantage. The corona virus pandemic is like a one-stop-shop for such material!
The COVID-19 pandemic of 2020 is rich with economic lessons, from why toilet paper is currently being bought in seemingly irrational amounts to what happens when everyone is forced to drastically reduce interacting with each other in person. Importantly, big decisions are being made under tons of uncertainty, by a bunch of people in different institutional environments, with varying levels of expertise, for a whole bunch of people whose livelihoods are at stake. Thus, not only are there great lessons and fantastic analytical commentary to be made after the fact, economics can help inform the actual process!
But, it’s hard for people to hear about economics over the noise of panic.
People are rational. At least, that’s the premise on which economists base their models of human cooperation. This means that the actions individuals take are based on perceived relative costs and benefits. We add perceived and relative because we all value things differently, and the costs and benefits are subject to change under different constraints, respectively. These cost-benefit calculations, often subconscious, guide our decision-making process. But, we often make the wrong calculations, especially during panics.
Economics is often thought to be too analytical and logical. Though it certainly can be, individuals who use the economic way of thinking about the world might have an advantage during crises. They are inclined to think about the trade-offs or the unseen costs of our actions.
“In the sphere of economics an action, a habit, an institution or a law engenders not just one effect but a series of effects. Of these effects only the first is immediate; it is revealed simultaneously with its cause, it is seen. The others merely occur successively, they are not seen; we are lucky if we foresee them.
The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee.
However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately.”Bastiat, Frederic. 1850. What is Seen and What is Unseen. https://oll.libertyfund.org/pages/wswns
Many economists are aiming to be what Bastiat calls “true economists” by foreseeing the severe costs of quarantines and other heavy-handed measures used to mitigate the pandemic. Because many of these costs are unseen, it’s hard for panicked individuals to waste a breath on seriously considering the effects of a potential overreaction.
Moreover, what is “seen” are real-time death counts on hundreds of different websites. These graphs are televised, have flooded social media news feeds, and completely taken over the conversation. Elegantly presented death tolls, and their purported rates, are incredibly emotive. As normal, feeling, humans, it’s easy to be captured by a phenomenon that is murdering people in real-time, in front of our faces…well, our screens. Health care providers certainly see the effects in their faces as hospitals scramble with the increase and demand and limited capacity. In other words, it’s easy to panic. And, once we’re in panic mode, it’s fight or flight. Forward-looking reason seemingly disappears.
The “unseen” costs are the compounding effects each minute of forced quarantine has on the market economy. The financial crisis and subsequent long-term unemployment are estimated to have killed 500,000 people. Keep in mind that at its peak, the US reached an unemployment rate of a whopping 10 percent in 2010. Since then, it has steadily improved to 3.4 percent. Preliminary unemployment estimates as a result of the corona virus are massive, from 9 percent to upwards of 20 percent. The coming layoffs for countless low-income workers, tipped workers, and workers living paycheck to paycheck, will be fatal. What’s more is that forcing the move to remote work, will have lasting effects and may contribute to long-term unemployment as the economy begins to restructure.
This is only the tip of the iceberg. Will the poor attempt at “flattening the curve” force health care providers to make life-threatening trade-offs for a longer period of time? What are the effects of the shutdown on human capital formation in schools? How long could the federal government safety net of extreme deficit spending be sustained? Should we consider the thought that perhaps multiple trillion dollar stimulus packages may have some long-term effects?
Regardless of political leanings, we should welcome the economic way of thinking to the conversation. Instead of screaming that “individuals who think a massive shutdown might be a terrible idea aren’t considering the loss of life at hand,” why not believe they, too, are interested in saving lives?
The consideration of alternatives should not minimize the gravity of the situation. Real people are getting sick. Real people are in serious danger from being infected. The COVID-19 pandemic is not a joke. And, that’s the point. Because serious decision-making is happening, understanding and addressing the costs are of paramount importance.
Economics, if taught well, should have a life-changing impact on a student. It forces the student to hold back their repugnance and attempt to look at both explicit, or seen costs, and the implicit, unseen costs, as objectively as possible, and apply theories of exchange to different phenomena. Claims like the optimal number of genocides in the world is greater than zero, that kidneys bought and sold on the market saves more lives, and that we should legalize the hunting of rhinos to keep them from going extinct, will undoubtedly elicit an emotional response. But, that’s the beauty of the economic way of thinking. It is both obvious and startling. It can bring out the color in the harmless mundane and, at the same time, help sharpen decision-making under high-stress, high-stakes, and scarce conditions such as the COVID-19 pandemic.
Perhaps, individuals equipped with the tools of economics have trained for this real-life shock. They are trying to add the disastrous and likely fatal consequences they foresee to the conversation. Sometimes they have to scream.
It’s just hard to scream louder than the panicked.